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2 “hot” lithium stocks & 1 for the speculators

It would come as no surprise that prices for lithium – the great “green” metal hope of the energy transition – have been very strong this year, pushed by shortages to the highest prices in three years. The price of lithium carbonate in China has almost quadrupled (up 276%) since the start of the year, thanks to strong demand from the electric-vehicle (EV) industry as sales of EVs increase. Lithium hydroxide prices have also had a strong year, up 175%.

With very little inventory around and demand set to more than triple by 2025, buyers are snapping up all the lithium they can.

This has been great news for the share prices of the Australian producers – which have not always followed the hype around the lithium space in a linear fashion.

The problem for investors is that in many cases the rebound has pushed the ASX-listed lithium stocks past their fair value, and bargains have become difficult to find.

The best value appears to be in the established producers, MinRes and Orocobre; with Piedmont Lithium looking like the best punt for the speculators.

 

1. Mineral Resources (MIN, $43.53)

Market capitalisation: $8.2bn

12-month total return: 44.5%

3-year total return: 50.7% a year

FY21 Yield: 4.5% fully franked (grossed-up, 6.4%)

FY22 Estimated Yield: 3.1% fully franked (grossed-up, 4.5%)

Analysts’ consensus target price: $52 (Thomson Reuters), $53.17 (FN Arena)

 

It’s been a tale of two commodities for diversified producer Mineral Resources. Usually, the bonus of getting lithium exposure through MinRes is that you also have the diversification benefits of the company also being Australia’s fifth-largest iron ore producer, as well as having a stable base of cash flow and profits coming off the mining services business. MinRes is the world’s largest crushing contractor, and a leading “pit-to-port” mining services supplier.

However, the problems in iron ore have sent MinRes’ market value falling by about one-third from its peak, in July. From its all-time high of US$229.50 a tonne in May this year, iron ore has subsided to US$96.50 a tonne – a slump of 56%. That has hurt Mineral Resources, which saw its average realised price across both its Yilgarn (lower-grade ore) and Pilbara operations plunge from US$178 a dry metric tonne in the June 2021 quarter to US78.32, down by exactly the same, 56%.

MinRes is one of the world’s top five lithium miners. It owns 50% of the Mt Marion spodumene (hard-rock lithium ore) mine and processing plant near Kalgoorlie, with the other half owned by Chinese company Jiangxi Ganfeng, which is also the mine’s offtake partner. Mt Marion lifted its output by 34% in FY21, to 484,984 dry metric tonnes (dmt) of spodumene concentrate, virtually all of it exported to China. The 2020-21 production was well above MinRes’ guidance of 450,000 to 475,000 dmt.

MinRes also owns 40% of the Wodgina deposit in Western Australia’s Pilbara region, one of the largest known hard rock lithium deposits in the world, with the majority owner being US-based chemicals giant Albemarle. Wodgina has an expected mine life of more than 30 years, shipping 750,000 tonnes a year of 6% spodumene concentrate to Chinese customers. The partners mothballed Wodgina in October 2019, to sit-out weak lithium prices: they have now committed to a restart, with Wodgina expected to be back in business fully during the third quarter of 2022.

The partners are also building Australia’s second lithium hydroxide plant, at Kemerton, southwest of Perth, which is on track to produce its first battery-grade product by the end of this year. It will have capacity for 50,000 tonnes a year once in full swing.

Then there is the iron ore, in which MinRes is transitioning from a low-volume producer to a high-volume, long-life producer, mainly through building its Ashburton hub in WA, which will be a state-of-the-art 30 million tonnes-a-year project, with the ore transported via “transhipper” barges to Cape-size carriers offshore. MinRes is aiming for first-ore-on-ship at the end of calendar 2023. One caveat is that the operation will produce ore with about 57.5% Fe (iron) content, rather than the traditional 60%–62% iron ore sold by major rivals BHP and Rio Tinto from the Pilbara – but the success of Fortescue Metals tells you that there is no inherent business problem with producing lower-content iron ore.

So, you have a significant producer of both iron ore and lithium, backed by one of Australia’s largest mining services contracting businesses, and with the bonus of a developing energy business, following a recent major gas discovery in the Perth Basin. At this point, MinRes is mainly talking about supplying energy to its own operations.

Because of this diversification, Mineral Resources is a fully-franked dividend payer; but analysts see the $2.75 a share dividend paid for FY21 being significantly lowered in FY22. FNArena’s consensus of analysts’ estimates expects 121.3 cents, rising to 152.3 cents in FY23; Thomson Reuters expects 136.5 cents this year and 114.9 cents in FY23.

That lowers the expected yield considerably, but it is still enough for an expected grossed-up yield pushing toward 4.5%. On the substantial undervaluation that analysts see in the share price, MinRes looks like a quite attractive total return option.

 

2. Orocobre (ORE, $9.28)

Market capitalisation: $6bn

12-month total return: 136.9%

3-year total return: 32.4% a year

FY21 Yield: no dividend paid

Analysts’ consensus target price: $9.71 (Thomson Reuters), $10.15 (FN Arena)  

 

In April, Galaxy Resources (GXY) and Orocobre (ORE) agreed to a merger to create the world’s fifth-largest lithium chemicals company, worth $4bn. The deal created “a new force in the global lithium sector,” with “a diversified production base and exciting growth platform, with potential to unlock significant synergies and realise value”. The two companies – which will soon be renamed ALLKEM – have a complementary portfolio of brine and hard-rock spodumene (lithium ore) assets spread across Australia (Galaxy) and Argentina (Orocobre), boron production in Argentina, and a vertically-integrated supply chain.

Orocobre owns 66.5% of the Olaroz lithium facility in Argentina’s high desert, where briny groundwater is pumped to the surface, concentrated in evaporation ponds, then purified into lithium carbonate of more than 99% purity. As such, it is different to its hard-rock mining rivals – it bills itself as a supplier of lithium chemicals rather than lithium ore. Galaxy owns and operates the Mt Cattlin mine in Ravensthorpe, Western Australia, which produces spodumene and tantalum concentrate, the James Bay lithium pegmatite (another lithium ore) project in Canada, and is developing the Sal de Vida lithium and potash brine project in Argentina.

ALLKEM boasts two mining operations generating positive cashflow and a long list of growth projects. It will also have exposure to a third significant part of the lithium “story” – downstream processing. Orocobre owns a 75% stake in a processing plant that is being built in Japan. The Naraha plant will turn lithium carbonate from Olaroz into lithium hydroxide, which is the product increasingly in demand from the manufacturers of modern lithium ion batteries. ALLKEM expects to start commissioning the 10,000 tonnes-a-year plant in the first quarter of 2022.

As would be expected with surging lithium prices, Olaroz is getting really strong numbers: at the end of the financial year, the operation’s realised average price of US$8,476 a tonne was up 45% on the previous quarter and more than double (up 117%) the June 2020 figure. The gross margin at Olaroz is running at 52%. Sales rose by 27% in FY21. Budgeted FY22 production is fully contracted and ALLKEM expects prices of US$9,000 a tonne for the first half.

At Mount Cattlin, the September 2021 quarter was another record quarter, with 67,931 dry metric tonnes (dmt) of production from Mt Cattlin, at a unit cash cost of US$351 per tonne. The operation shipped 89,640 of product, with a realised average price of US$779 per tonne, generating revenue of US$69.8 million. Early construction and procurement at Sal de Vida continues. The feasibility study works and basic engineering at James Bay are in the final stages.

There is no dividend on the horizon for ORE/ALLKEM investors, but there looks to be good value in the share price – particularly in the view of Macquarie, the most bullish broker on the stock, which has a price target of $12.00 on the stock.

 

3. Piedmont Lithium (PLL, 76 cents)

Speculators could take a look at Piedmont Lithium (PLL, 76 cents), which owns the Piedmont Lithium project, located in the Carolina tin-spodumene belt in North Carolina. PLL hit the headlines in September 2020 when it signed a five-year deal with EV giant Tesla, to supply spodumene concentrate to the carmaker from its North Carolina deposit. The supply deal must commence between July 2022 and July 2023.

Carolina is the only spodumene deposit in the US. Under the Tesla agreement, Piedmont will supply its spodumene at a fixed price, with the option to extend its sales agreement for a further five years. The deal will cover one-third of the miner’s planned spodumene concentrate production of 160,000 tonnes a year for five years: additional quantities of spodumene concentrate may be delivered “at Tesla’s option.” The Tesla sales will generate 10%–20% of Piedmont’s total expected revenue from its mine-to-hydroxide project.

Last month, the company boosted the mineral resource estimate at Carolina to 44.2 tonnes at 1.08% lithium oxide, up from 39.2 million tonnes. The “indicated” resource category doubled, to 28.2 million tonnes at 1.11% lithium oxide. The company expects to complete a definitive feasibility study on the project by the end of December.

Thomson Reuters’ consensus (two analysts) valuation sits at $1.35 – that looks pretty attractive to lithium punters who are looking at a lot of price situations that have run very strongly.

Elsewhere, value is very hard to find in the space.

Liontown Resources (LTR) expects to be producing lithium-rich spodumene concentrate at Western Australia’s Kathleen Valley project – one of the largest lithium development projects in the world –  before June 2024. At $1.85, the share price is up almost 700% in 12 months, and analysts’ consensus sees $2.00 as its limit.

Pilbara Minerals (PLS) is the leading “pure-play” lithium miner on the ASX, producing spodumene and tantalite concentrates from its flagship Pilgangoora project in Western Australia’s Pilbara region, but the PLS share price has more than tripled this year. At a share price of $2.50 – and up 265% in 12 months – PLS has run well past the analysts’ consensus valuation numbers of $2.25 (Thomson Reuters) and $2.34 (FN Arena).

 

 

James Dunn is a financial journalist. All prices and analysis at 29 November 2021. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.

About the author
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James Dunn , Switzer

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.

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James Dunn

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